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October 27, 2011

FT: Netflix

Netflix drops plans to split DVD and online

By David Gelles in New York

Reed Hastings, Netflix chief executive, made an about-turn following pressure from investors and customers

Netflix has buckled under pressure from investors and customers to make one of the most high profile US corporate strategic u-turns in recent years, backing off from a controversial plan to split its mail-order DVD and its online streaming media businesses.

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Richard Greenfield, analyst at BTIG, called the move a “necessary reversal of a bad decision”.

Shares in Netflix had fallen 60 per cent since July, as investors and analysts reassessed the company’s long-term prospects. Netflix traded up modestly in midday trading, but the finished the day down 4.8 per cent to $111.62.

“They’ve completely alienated their customers at a time when there are strong new threats,” said Shahid Khan, a consultant with MediaMorph. “I don’t think their stock is ever going to recover.”

Mr Hastings last month said he would separate the mail-order business, which is declining, into a new company, called Qwikster, and keep the growing online streaming business as Netflix.com. But on Monday Mr Hastings completed an about-face.

“There is a difference between moving quickly – which Netflix has done very well for years – and moving too fast, which is what we did in this case,” he said.

The plan to split the company followed a price increase in July that caused Netflix to lose at least 1m subscribers. Mr Hastings on Monday said there would be no more price increases.

Analysts said the introduction of Qwikster and its quick demise ranks among the more spectacular debacles in recent business history.

“This doesn’t quite rise to the same level of self-destruction as New Coke [when Coca-Cola briefly tried a new formula in 1985],” said Adam Hanft, a brand strategist who works with media and technology companies. “But it’s pretty close.”

Mr Hanft drew a comparison between former Apple chief executive Steve Jobs, who died last week, and Mr Hastings: “It points to how sure-footed Apple is in understanding consumer behaviour, and how Netflix has lost its way.”

As Netflix works to attract new customers and retain existing ones, it is having to spend hundreds of millions of dollars on new content deals with television and film studios such as Fox, AMC and DreamWorks. Those costs continue to rise, and negotiations between Netflix and Starz, the premium cable network that owns rights to films by Walt Disney and Sony Pictures, recently broke down.

The turmoil has prompted a fresh analysis of the company’s value. “In the long run if they go all digital, the economics may not work,” Mr Khan said. “The whole love affair with Netflix is, if not over, at least tainted.”